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Thursday, December 31, 2015

One of the economic miracles of the holiday shopping season is that we all troop merrily off to retail stores fully expecting that they will display a large and varied selection of goods on their shelves. I went to a grocery store on the morning of Christmas Eve, with no doubt in my mind that I would be able to pick up an idiosyncratic list of last-minute items for holiday meals--and indeed, everything was there.

The category of "inventories" refers to how much is sitting on the shelf somewhere, waiting to be used or sold. Tying up resources in holding inventories has a cost, and over time, information technology and transportation improvements have made it easier to use "just-in-time" processes for re-ordering that make it possible to hold smaller inventories. Still, the size of inventories reveals something about expectations for future business activity, and also whether those expectations were met. What's interesting is that for the last few years, inventories across the economy are on the rise. The figures below are from the ever-useful FRED data tool maintained by the Federal Reserve Bank of St. Louis. The underlying data is updated through October 2015.

Consider the ratio of inventories/dales in the retail sector first. Notice the gradual decline over timef from 1990 into the early 2000s, as information technology made it possible to hold fewer resources. Notice also that during the two periods of recession, inventories first spiked up, as retailers found themselves with unexpected stock on their shelves, and then plummeted, as retailers delayed re-ordering until they were fairly confident that the economy was growing again. Indeed, the sharp rise-and-fall pattern of inventories is a mechanism that causes a recession to last over time. Finally, notice that since about 2012, the inventory/sales ratio is on the rise.

The inventory/sales ratio for manufacturers has a broadly similar pattern: the slow decline after 1990, the spike and decline during the Great Recession; and an uptick--albeit a more recent and modest uptick than in the retailer inventory/sales ratio--during the last year or so.
Finally, here's the inventory/sales pattern for wholesalers, who stand between producers and retailers. Here, the inventory/sales ratio didn't drop by much from about 1990 into the early 2000s: apparently, lower inventories for retailers didn't mean less was being held back in the warehouses of wholesalers. However, there is a decline in the early 2000s, a truly striking spike during the Great Recession, and a much sharper recent upswing.

As with any story in economics, there can be multiple interpretations of these patterns, some happier than others.

1) The most obvious pattern is that retailers, manufacturers, and wholesalers all expect sales to continue rising in 2016. Indeed, business inventories in general are sometimes used as a way of measuring "business confidence."

2) A complementary interpretation is that with very low interest rates during the last few years, the costs of having supplies sitting around on a shelf waiting to be used is relatively low. This factor doesn't explain the timing of the more recent rises in inventories, but it explains why they might have rebounded at least somewhat since the end of the recession in 2009, compared with pre-recession levels.

3) The rise in inventories may also be a message that trimming inventories went a little too far back around 2005, and the pendulum is swinging back a little.

4) Finally, I wouldn't be fulfilling my duty to the inherent pessimism of economics if I didn't point out that the rise in wholesaler inventories during the year or two is very large by historical standards. This may be occurring just because the inventory/sales ratio for wholesalers is different: for example, it didn't fall during the 1990s, and it spiked more emphatically during the Great Recession. But given when inventories pile up too substantially, it can help be part of a slowdown later, one hopes that wholesalers are not misleading themselves about about how much they are going to sell going forward.

Wednesday, December 30, 2015

Paul Krugman was "quite unhappy" with a paragraph in my blog post last Monday concerning "Secular Stagnation: An Update." In his characteristic high-decibel mode, Paul manages in a single post to use the phrases "both wrong and, to some extent, cowardly," "change the subject," "actually engaged in an act of evasion," "refusing to take sides is a dereliction of responsibility," and more. I confess that I am generally dubious as to whether dueling blog posts shed more light than heat. But once Krugman gets done tossing sand around the sandbox, what is actually at issue here?

To review the bidding: My original post was focused on a recent essay by Larry Summers on "secular stagnation," the concern that the economy may be entering a period of sluggish investment and slow long-run growth--at least if appropriate policy steps aren't taken. In the paragraph that bugged Paul, I expressed doubts that fiscal and monetary policy would address a long-run secular stagnation problem, and instead suggested focusing on a structural pro-growth agenda. Paul views this as wrong, cowardly, subject-changing, evasion, dereliction, etc. because as he writes: "But if you have a persistent problem of inadequate demand — which is the secular stagnation argument — then find things that will boost demand. Don’t throw up your hands and whine that you can’t, and/or use demand-side problems to argue for other stuff that has no obvious relevance to the problem."

It's an strong claim that the long-run secular stagnation problem is exclusively a demand problem To put it another way, Krugman's view is apparently that US long-run productivity growth would be just fine if we would only make more aggressive use of macroeconomic tools to boost aggregate demand, and anyone who raises any non-demand approach is wrong, cowardly, subject-changing, evasion, dereliction, etc.

What about the fighting secular stagnation by using fiscal and monetary stimulus to push for more demand? On the topic of fiscal stimulus, Krugman writes: "First of all, we did not, repeat not, have massive stimulus." As evidence, he offers a chart on the budgetary effect of one piece of legislation: the American Recovery and Reinvestment Act of 2009. Paul concludes that because this one law had an effect of 2% of GDP, total fiscal stimulus was 2% of GDP. But as I assume Paul knows perfectly well, one law doesn't summarize fiscal policy. Here's a graph showing budget deficits since the 1930s as a share of GDP. The deficits for the four years from 2009 to 2012 (9.8%, 8.7%, 8.5%, and 6.8% of GDP, respectively) are the four largest annual deficits since 1930, barring only the deficits of the World War II years. (And yes, if you would prefer to look at cyclically adjusted deficits, CBO estimates still say that 2009-2012 were the four largest annual deficits since World War II.)

"For comparison, the sizable Reagan budget deficits of the 1980s increased the debt/GDP ratio from 25.8% in 1981 to 41% by 1988—a rise of about 15 percentage points over seven years. During the George W. Bush years, the debt-GDP ratio went from 32.5% in 2001 to 40.5% in 2008—a rise of 8 percentage points in eight years. Going back to the Great Depression, the debt/GDP ratio rose from 18% of GDP in 1930 to about 44% in 1940 – a rise of 26 percentage points over 10 years. The only comparable U.S. episodes of running up this kind of debt happened during major wars. For example, the federal debt/GDP ratio went from 42.3% in 1941 to 106.2% in 1945—a rise of 54 percentage points in four years. From this perspective, the fiscal stimulus from 2008 to 2012, as measured by the rise in the debt/GDP ratio, has been about about two-thirds of the size of World War II spending."

On the topic of monetary policy, my essay expressed doubts that it would address secular stagnation. For the record, I write as someone who supported the Fed's monetary policy actions of reducing interest rates and engaging in quantitative easing during the Great Recession and in the years just after, but also someone who has expressed fears that those policies may have been extended too long.

What Krugman apparently views as a critique of this position sounds like this: "Monetary policy has indeed had difficulty gaining traction. But that’s exactly what anyone who thought through the implications of the liquidity trap — which, you know, some us did long before the 2008 crisis — expected to happen. And what such analysis suggests is that the right solution to this problem, if you can get it, is higher inflation expectations." So it's apparently wrong, cowardly, subject-changing, evasion, dereliction, etc. for anyone other than Krugman to express doubts on using monetary policy to boost demand, but if Paul says monetary policy under current economic conditions hasn't worked well, wasn't expected to work well, and maybe can't work well ("if you can get it"?!), then apparently it's all hunky-dory. Clearly, some advice-giver who has no problem telling other people what they have a responsibility to say needs to tell Paul: "Don’t throw up your hands and whine that you can’t."

So, quick summary for an overlong post: I believe that using fiscal and monetary policy to boost aggregate demand during the recession and in the years immediately after made sense. On fiscal policy, Krugman's view on fiscal stimulus from 2009-2012 is apparently "too small, but worked great," while my own view is "about the right size, and worked OK." While I do not obsess over cutting budget deficits in the short-run, I am skeptical that much larger and sustained deficits are the answer to the long-run secular stagnation issue. On monetary policy, I apparently agree with Krugman that monetary policy in general has a hard time during a liquidity trap, and that it may have trouble addressing secular stagnation, too.

When it comes to the long-run problem of secular stagnation--which was after all the topic of the original post--I agree with the view originally expressed by Alvin Hansen as well as by others since then that the pace of invention and ability to develop new resources of all kinds can be important drivers for investment. I disagree with Krugman's view that secular stagnation is purely a demand problem. I also disagree that when it comes to addressing the problem of sluggish investment and the risk of secular stagnation, raising non-demand approaches is cowardly, subject-changing, evasion, dereliction, etc. Isn't it possible any more that two people just honestly disagree?

Follow-up note: Here's a follow-up comment from Krugman, which I had not seen before writing the post above. My original post was called "Secular Stagnation: An Update," and thus, I asked whether monetary and fiscal policy could address long-run secular stagnation. Krugman's latest post doesn't mention secular stagnation, or whether monetary or fiscal policy can address it, and instead focuses on how fiscal policy was needed as countercyclical policy in the previous recession and will be needed in the next one.

Also, for the record, just because Krugman puts quotation marks around a statement one sentence after my name, it would be unwise to assume that he is actually quoting me or even paraphrasing me with any accuracy, rather than just naming a position he wishes to argue against.

As noted above, I agree with the importance of countercyclical fiscal policy during recessions, but because it's important in recessions doesn't mean it's a equally useful tool in an economy with a 5% unemployment rate facing a risk of long-run sluggish investment and secular stagnation. In this post, Paul's latest method of measuring fiscal stimulus--to show that fiscal policy was far too small from 2009-2012--has now become the change in government employment. Readers can make their own judgment about whether an upsurge in government employment is a plausible long-run approach to improving investment incentives. Readers can also judge for themselves whether encouraging government employment is a more appropriate measure of fiscal policy than, well, the actual size of fiscal deficits as discussed above. Naturally, in this more recent post Krugman has more about how the cowardly, subject-changing, evasion, dereliction, etc., people like me now "just make up a policy history that never happened." Readers can make their own judgments on this theme, too.

Tuesday, December 29, 2015

During the last weeks of the year, as people gather with family and with friends old and new, there is always a hope that that next year, or maybe the year after, will bring joy and peace. In that spirit, here is the famous passage from a speech by President Dwight D. Eisenhower called "The Chance for Peace," which was delivered to the American Society
of Newspaper Editors on April 16, 1953.

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a
theft from those who hunger and are not fed, those who are cold and are not clothed. This world
in arms is not spending money alone.

It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.

The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities.

It is two electric power plants, each serving a town of 60,000 population.

It is two fine, fully equipped hospitals.

It is some 50 miles of concrete highway.

We pay for a single fighter plane with a half million bushels of wheat.

We pay for a single destroyer with new homes that could have housed more than 8,000 people.

This, I repeat, is the best way of life to be found on the road the world has been taking.
This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is
humanity hanging from a cross of iron.

These plain and cruel truths define the peril and point the hope that comes with this spring of
1953.

This is one of those times in the affairs of nations when the gravest choices must be made, if
there is to be a turning toward a just and lasting peace.

It is a moment that calls upon the governments of the world to speak their intentions with
simplicity and with honesty.

It calls upon them to answer the question that stirs the hearts of all sane men: is there no other
way the world may live?

For economists, Eisenhower's comment are of course a stirring illustration of the power of opportunity costs--that is, the insight that a choice to proceed in one way involves the tradeoff of alternative choices that could have been made.

For everyone else, the main focus of Eisenhower's speech was to state that the United States would prefer not to have a buildup of arms and nuclear weapons, and to appeal to the Soviet Union to choose a different course. Some people who expressed such wishes might be dismissed as impractical dreamers. But Eisenhower had been Supreme Commander of the Allied forces in Europe during World War II. No one doubted his ability or his resolution to lead a fight, if its was called for. Here's a lesser-known part of Eisenhower's speech. It's interesting to contemplate if there is any modern political figure in the last couple of decades who has had both the desire and the hard-won credibility to offer a similar set of comments--although tailored of course to changes since Eisenhower's 1953 speech and to the realities of the present:

The details of such disarmament programs are manifestly critical and complex. Neither the
United States nor any other nation can properly claim to possess a perfect, immutable formula.
But the formula matters less than the faith--the good faith without which no formula can work
justly and effectively.

The fruit of success in all these tasks would present the world with the greatest task, and the
greatest opportunity, of all. It is this: the dedication of the energies, the resources, and the
imaginations of all peaceful nations to a new kind of war. This would be a declared total war, not
upon any human enemy but upon the brute forces of poverty and need.

The peace we seek, rounded upon decent trust and cooperative effort among nations, can be
fortified, not by weapons of war but by wheat and by cotton, by milk and by wool, by meat and
by timber and by rice. These are words that translate into every language on earth. These are
needs that challenge this world in arms.

This idea of a just and peaceful world is not new or strange to us. It inspired the people of the
United States to initiate the European Recovery Program in 1947. That program was prepared to
treat, with like and equal concern, the needs of Eastern and Western Europe.

We are prepared to reaffirm, with the most concrete evidence, our readiness to help build a world
in which all peoples can be productive and prosperous.

This Government is ready to ask its people to join with all nations in devoting a substantial
percentage of the savings achieved by disarmament to a fund for world aid and reconstruction.
The purposes of this great work would be to help other peoples to develop the undeveloped areas
of the world, to stimulate profitable and fair world trade, to assist all peoples to know the
blessings of productive freedom.

The monuments to this new kind of war would be these: roads and schools, hospitals and homes,
food and health.

We are ready, in short, to dedicate our strength to serving the needs, rather than the fears, of the
world.

We are ready, by these and all such actions, to make of the United Nations an institution that can
effectively guard the peace and security of all peoples.

Monday, December 28, 2015

Since the end of the Great Recession, the US (and the world) economy have been waiting for a bounceback of economic growth. About two years ago, Larry Summers resuscitated a theory put forward by Alvin Hansen in the 1930s that the economy might instead be entering a period of "secular stagnation."

Mainstream estimates of the potential output of the economy--that is, how big the economy woudl be with full employment of labor and capital resources--is diminishing. Here's a figure showing estimates over a series of years of how potential US GDP would rise, from the Congressional Budget Office.

It's no surprise that the actual GDP would dip below the potential in 2008 and 2009: after all, a recession is by definition a prolonged period in which the actual output of an economy is below the potential. But notice how the CBO has kept reducing its estimate of potential GDP. Back in 2007, the prediction was that potential GDP would be about $20 trillion in 2017: by 2015, the estimate was that potential GDP would be $18 trillion. To put it another way, the CBO is estimate that the potential growth of the US economy is slowing down.

Summers argues that expectations of slow future growth are being reflected in expectations of low interest rates far into the future.

And if you don'r not remember anything else, .. remember this ... nowhere in the industrial world is there an expectation that over 10 years inflation will reach the two percent target. Nowhere in the industrial world is there an expectation that real interest rates will average even one percent and ... if you take any kind of reasonable weighted average, the real interest rate over the next 10 years is expected to be zero. And since, with an upper-sloping turn structure, we normally assume that there are some risk premiums, or the liquidity premiums embodied here, probably expected real rate are even lower ... .

Summers puts the patterns together in this way:

"I would suggest that these events are closely related. I would suggest that what has gone on, certainly in recent years, and for quite a long time, is that there have been a variety of structural changes in the economies of the industrial world that lead to an increasing propensity to save, a decreasing propensity to invest, and, as a consequence, lower equilibrium real rates; as a consequence, less aggregate demand and disappointing growth performance; and, as a consequence, less upward inflationary pressure. While I do not believe that precise sources have been well worked out or are easily identified, I believe that one possibility is the trends we have observed over last 20 years will continue."

Here is his list of possible reasons for this confluence of factors, which are discussed in more detail in the talk.

Summers has no straightforward policy answer to offer here. He notes using monetary policy to stimulate the world economy may prove difficult, given that the interest rates used for monetary policy are already at near-zero levels. He suggests considering more aggressive use of fiscal policy and debt financing--in some ways, as a method of counterbalancing excessive global saving--but there are obvious issues with a policy of large and sustained deficits over time.

In the past, I have called this the problem of "snowbank macroeconomics:" just as a driver of a car stuck in a snowbank can press the gas pedal as hard as they want and not make much progress, it seems to me that we are in a situation where monetary and fiscal stimulus that has been extremely high by historical standards since about 2008 has had a much smaller effect on output and inflation than would have been expected before the Great Recession. I've come to believe that in a financial crisis and its slow-growth aftermath, the basic tools of monetary and fiscal policy face real limits on what they can accomplish. Thus, I'd argue that the growth-based agenda should focus on a different list of issues: expanding education and training; expanding research and development spending; tax and regulatory reform; expanding international trade; and investments in energy and infrastructure.

Friday, December 25, 2015

My family always had real Christmas trees when I was growing up. I've always had real trees as an adult. Living in my own little bubble, it thus came as a shock to me to learn that, of the households that have Christmas trees, over 80% use an artificial tree, according to Nielsen survey results commissioned by the American Christmas Tree Association (which largely represents sellers of artificial trees). But in a holiday season where the focus is often on whether we are naughty or nice, what choice of tree has greater environmental impact?

(Note: This post first appeared on December 24, 2012. It has been slightly edited.)

Here are some of the main messages I take away from these studies:

1) One artificial tree has greater environmental impact than one natural tree. However, an artificial tree can also be re-used over a number of years. Thus, there is some crossover point, if the artificial tree is used for long enough, that its environmental effect is less than an annual series of trees. For example, the ellipsos study finds that an artificial tree would need to be used for 20 years before its greenhouse gas effects would be less than those of an annual series of natural trees. The PE Americas study offers a wide range of scenarios, and summarizes, but here is the situation "for the base case when individual car transport distance for tree purchase is 2.5 miles each way. Because the natural tree provides an environmental benefit in terms of Global Warming Potential when landfilled, and Eutrophication Potential when composted or incinerated, there is no number of years one can keep an artificial tree in order to match the natural tree impacts in these cases. ... For all other scenarios, the artificial tree has less impact provided it is kept and reused for a minimum between 2 and 9 years, depending upon the environmental indicator chosen."

2) The full analysis needs to look at effects across all the full life-cycle of the tree, whether natural or artificial. This seems to involve the following steps.

Under what conditions is the tree manufactured or cultivated, with what use of energy, fertilizer, and logging methods? By what combination of transportation mechanisms is the finished tree moved to the home? A substantial share of artificial trees are manufactured in China and then shipped to North America. What are the different issues in use of the tree, including use of water and emissions of fumes? What is the end-of-life for the tree? For example, the carbon in a natural tree will be stored for some decades if the tree goes into a landfill, but not if if is composted or incinerated.

3) The full analysis also needs to look at a range of possible effects. For example, the PE America study looked at "global warming potential (carbon footprint), primary energy demand, acidification potential, eutrophication potential, and smog potential." Here's a figure showing 14 categories of analysis from the ellipsos study, with a comparison between natural and artificial trees on a number of dimensions.

The ellipsos study sums up this way: "When aggregating the data in damage categories, the results show that the impacts for human health are approximately equivalent for both trees, that the impact for ecosystem quality are much better for the artificial tree, that the impacts for climate change are much better for the natural tree, and that the impacts for resources are better for the natural tree ..."

4) In the context of many other holiday and everyday activities, the environmental effects of the tree are small. The studies offer some comparisons of the environmental effects of the tree compared with the electricity used to light the tree, the driving by a household to pick up the tree, and even the environmental effect of the tree stand.

For example, in comparing Primary Energy Demand for the tree and the energy demand for lighting the tree. For an artificial tree, the PE Americas study reports: "The electricity consumption during use of 400 incandescent Christmas tree lights during one Christmas season is 55% of the overall Primary Energy Demand impact of the unlit artificial tree studied, assuming the worst‐case scenario that the artificial tree is used only one year. For artificial trees kept 5 and 10 years respectively, the PED for using incandescent lights is 2.8 times and 5.5 times that of the artificial tree life cycle." For a natural tree: "The life cycle Primary Energy Demand impact of the natural tree is 1.5 ‐ 3.5 times less (based on the End‐of‐Life scenario) than the use of 400 incandescent Christmas tree lights during one Christmas season."

In comparing the environmental effects of driving with those of the tree, ellipsos writes: "Due to the uncertainties of CO2 sequestration and distance between the point of purchase of the trees and the customer’s house, the environmental impacts of the natural tree can become worse. For instance, customers who travel over 16 km from their house to the store (instead of 5 km) to buy a natural tree would be better off with an artificial tree. ... [C]arpooling or biking to work only one to three weeks per year would offset the carbon emissions from both types of Christmas trees."

The PE Americas report strikes a similar theme: "Initially, global warming potential (GWP) for the landfilled natural tree is negative, in other words the life cycle of a landfilled natural tree that is a GWP sink. Therefore, the more natural trees purchased, the greater the environmental global warming benefit (the more negative GWP becomes). However, with increased transport to pick up the natural tree, the overall landfilled natural tree life cycled becomes less negative. When car transport becomes greater than 5 miles (one‐way), the overall life cycle of the natural tree is no longer negative, and there is a positive GWP contribution."

Even the tree stand for a natural tree has an environmental cost that can be considered in the same breath with the costs of a natural tree. PE Americas: "The tree stand is a significant contributor to the overall impact of the natural tree life cycle with impacts ranging from 3% to 41% depending on the impact category and End‐of‐Life disposal option."

I would add that the environment effect of the ornaments on the trees may be as large or greater than the effect of the tree itself. Data from the U.S. Census Bureau shows that America imported $1 billion in Christmas tree ornaments from China (the leading supplier) between January to September 2012, but only $140 million worth of artificial Christmas trees. Thus, spending on ornaments is something like six times as high as spending on trees. The choice of what kind of lights on the tree, or whether to drape the house and front yard with lights, is a more momentous environmental decision than the tree itself.

Of course, these kinds of comparisons don't even try to compare the environmental cost of the tree with the cost of the presents under the tree, or the long-distance travel to attend a family gathering. Thus, the PE Americas study concludes: "Consumers who wish to celebrate the holidays with a Christmas tree should do so knowing that the overall environmental impacts of both natural and artificial trees are extremely small when compared to other daily activities such as driving a car. Neither natural nor artificial Christmas tree purchases constitute a significant environmental impact within most American lifestyles." Similarly, ellipsos writes: "Although the dilemma between the natural and artificial Christmas trees will continue to surface every year before Christmas, it is now clear from this LCA study that, regardless of the chosen type of tree, the impacts on the environment are negligible compared to other activities, such as car use."

Certainly, celebrations at holidays and big events can sometimes be exorbitant and over the top. But the use of a Christmas tree, and the choice between a natural tree or an artificial tree, is a small-scale luxury. If the environmental issue is bothering you, even knowing these facts, make a resolution to use your artificial tree for a few more years, rather than replacing it, or to save some energy in January by driving less or being more vigilant about turning off unneeded lights. Gathering around the tree should be one less reason for moralizing around the holidays, not one more. So celebrate with good cheer and generous moderation.

Charles Dickens wrote what has become one of the iconic stories of Christmas day and Christmas spirit in "A Christmas Carol." But of course, the experiences of Ebenezer Scrooge are a story, not a piece of reporting. Yesterday, I offered an article by Charles Dickens about his views of "masters" and "hands" during a textile strike, written for the weekly journal Household Words that Dickens edited from 1850 to 1859. Here's another piece from Dickens from the journal from the issue of January 26, 1856, with his first-person reporting on "A Nightly Scene in London." Poverty in high-income countries is no longer as ghastly as in Victorian England, but for those who take the time to see it in our own time and place, surely it is ghastly enough.

Economists might also take note of Dickens's comment on the reactions to poverty certain economists of his day, who he calls "the unreasonable disciples of a reasonable school." He writes: "I know that the unreasonable disciples of a reasonable school, demented disciples who push arithmetic and political economy beyond all bounds of sense (not to speak of such a weakness as humanity), and hold them to be all-sufficient for every case, can easily prove that such things ought to be, and that no man has any business to mind them. Without disparaging those indispensable sciences in their sanity, I utterly renounce and abominate them in their insanity ..." [Note: A version of this post appeared a year ago on this blog, on Christmas Day 2014.] Here's Dickens:

On the fifth of last November, I, the Conductor of this journal, accompanied by a friend well-known to the public, accidentally strayed into Whitechapel. It was a miserable evening; very dark, very muddy, and raining hard.

There are many woful sights in that part of London, and it has been well-known to me in most of its aspects for many years. We had forgotten the mud and rain in slowly walking along and looking about us, when we found ourselves, at eight o'clock, before the Workhouse.

Crouched against the wall of the Workhouse, in the dark street, on the muddy pavement-stones, with the rain raining upon them, were five bundles of rags. They were motionless, and had no resemblance to the human form. Five great beehives, covered with rags— five dead bodies taken out of graves, tied neck and heels, and covered with rags— would have looked like those five bundles upon which the rain rained down in the public street.

"What is this! " said my companion. "What is this!"

"Some miserable people shut out of the Casual Ward, I think," said I.

We had stopped before the five ragged mounds, and were quite rooted to the spot by their horrible appearance. Five awful Sphinxes by the wayside, crying to every passer-by, " Stop and guess! What is to be the end of a state of society that leaves us here!"

As we stood looking at them, a decent working-man, having the appearance of a stone-mason, touched me on the shoulder.

"This is an awful sight, sir," said he, "in a Christian country!"

"GOD knows it is, my friend," said I.

"I have often seen it much worse than this, as I have been going home from my work. I have counted fifteen, twenty, five-and-twenty, many a time. It's a shocking thing to see."

"A shocking thing, indeed," said I and my companion together. The man lingered near
us a little while, wished us good-night, and went on.

We should have felt it brutal in us who had a better chance of being heard than the working-man, to leave the thing as it was, so we knocked at the Workhouse Gate. I undertook to be spokesman. The moment the gate was opened by an old pauper, I went in, followed close by my companion. I lost no
time in passing the old porter, for I saw in his watery eye a disposition to shut us out.

"Be so good as to give that card to the master of the Workhouse, and say I shall be glad to speak to him for a moment."

We were in a kind of covered gateway, and the old porter went across it with the card. Before he had got to a door on our left, a man in a cloak and hat bounced out of it very sharply, as if he were in the nightly habit of being bullied and of returning the compliment.

"Now, gentlemen," said he in a loud voice, "what do you want here?"

"First," said I, " will you do me the favor to look at that card in your hand. Perhaps you may know my name."

"Yes," says he, looking at it. " I know this name."

"Good. I only want to ask you a plain question in a civil manner, and there is not the least occasion for either of us to be angry. It would be very foolish in me to blame you, and I don't blame you. I may
find fault with the system you administer, but pray understand that I know you are here to do a duty pointed out to you, and that I have no doubt you do it. Now, I hope you won't object to tell me what I want to know."

"No," said he, quite mollified, and very reasonable, " not at all. What is it?"

"Do you know that there are five wretched creatures outside?"

"I haven't seen them, but I dare say there are."

"Do you doubt that there are?"

"No, not at all. There might be many more."

''Are they men? Or women?"

"Women, I suppose. Very likely one or two of them were there last night, and the night before last."

"There all night, do you mean?"

"Very likely."

My companion and I looked at one another, and the master of the Workhouse added quickly, " Why, Lord bless my soul, what am I to do? What can I do ? The place is full. The place is always full—every night. I must give the preference to women with children, mustn't I? You wouldn't have me not do that?"

"Surely not," said I. "It is a very humane principle, and quite right; and I am glad to hear of it. Don't forget that I don't blame you."

"Well!" said he. And subdued himself again. ...

"Just so. I wanted to know no more. You have answered my question civilly and readily, and I am much obliged to you. I have nothing to say against you, but quite the contrary. Good night!"

"Good night, gentlemen!" And out we came again.

We went to the ragged bundle nearest to the Workhouse-door, and I touched it. No movement replying, I gently shook it. The rags began to be slowly stirred within, and by little and little a head was unshrouded. The head of a young woman of three or four and twenty, as I should judge; gaunt with want, and foul with dirt; but not naturally ugly.

"Tell us," said I, stooping down. "Why are you lying here?"

"Because I can't get into the Workhouse."

She spoke in a faint dull way, and had no curiosity or interest left. She looked dreamily at the black sky and the falling rain, but never looked at me or my companion.

"Were you here last night?"

"Yes, All last night. And the night afore too."

"Do you know any of these others?"

"I know her next but one. She was here last night, and she told me she come out of Essex. I don't know no more of her."

"You were here all last night, but you have not been here all day?"

"No. Not all day."

"Where have you been all day?"

"About the streets."

''What have you had to eat?"

"Nothing."

"Come!" said I. "Think a little. You are tired and have been asleep, and don't quite consider what you are saying to us. You have had something to eat to-day. Come! Think of it!"

"No I haven't. Nothing but such bits as I could pick up about the market. Why, look at me!"

She bared her neck, and I covered it up again.

"If you had a shilling to get some supper and a lodging, should you know where to get it?"

"Yes. I could do that."

"For GOD'S sake get it then!"

I put the money into her hand, and she feebly rose up and went away. She never thanked me, never looked at me— melted away into the miserable night, in the strangest manner I ever saw. I have seen many strange things, but not one that has left a deeper impression on my memory than the dull impassive way in which that worn-out heap of misery took that piece of money, and was lost.

One by one I spoke to all the five. In every one, interest and curiosity were as extinct as in the first. They were all dull and languid. No one made any sort of profession or complaint; no one cared to look at me; no one thanked me. When I came to the third, I suppose she saw that my companion
and I glanced, with a new horror upon us, at the two last, who had dropped against each other in their sleep, and were lying like broken images. She said, she believed they were young sisters. These were the only words that were originated among the five.

And now let me close this terrible account with a redeeming and beautiful trait of the poorest of the poor. When we came out of the Workhouse, we had gone across the road to a public house, finding ourselves without silver, to get change for a sovereign. I held the money in my hand while I was speaking to the five apparitions. Our being so engaged, attracted the attention of many people of the very poor sort usual to that place; as we leaned over the mounds of rags, they eagerly leaned over us to see and hear; what I had in my hand, and what I said, and what I did, must have been plain to nearly all the concourse. When the last of the five had got up and faded away, the spectators opened to let us pass; and not one of them, by word, or look, or gesture, begged of us.

Many of the observant faces were quick enough to know that it would have been a relief to us to have got rid of the rest of the money with any hope of doing good with it. But, there was a feeling among them all, that their necessities were not to be placed by the side of such a spectacle; and they opened a
way for us in profound silence, and let us go.

My companion wrote to me, next day, that the five ragged bundles had been upon his bed all night. I debated how to add our testimony to that of many other persons who from time to time are impelled to write to the newspapers, by having come upon some shameful and shocking sight of this description. I resolved to write in these pages an exact account of what we had seen, but to
wait until after Christmas, in order that there might be no heat or haste. I know that the unreasonable disciples of a reasonable school, demented disciples who push arithmetic and political economy beyond all bounds of sense (not to speak of such a weakness as humanity), and hold them to be all-
sufficient for every case, can easily prove that such things ought to be, and that no man has
any business to mind them. Without disparaging those indispensable sciences in their sanity, I utterly renounce and abominate them in their insanity; and I address people with a respect for the spirit of the New Testament, who do mind such things, and who think them infamous in our streets.

Thursday, December 24, 2015

There's a sort of parlor game that the economically-minded sometimes play around the Christmas holiday, related to A Christmas Carol, by Charles Dickens. Was Dickens writing his story as an attack on economics, capitalism, and selfishness? After all, his depiction of Ebenezer Scrooge, along with his use of phrases like "decrease the surplus population" and "a good man of business" would suggest as much, and a classic example of such an interpretation is here. Or was Dickens just telling a good story with distinct characters? After all, Scrooge is portrayed as an outlier in the business community. The warm portrayal of Mr. Fezziwig certainly opens the possibility that one can be a successful man of business as well as a good employer and a decent human being. And if Scrooge hadn't saved money, would he have been able to save Tiny Tim? It's all a good "talker," as they say about the topics that get kicked around on radio shows every day.

I went looking for some other perspectives on how Charles Dickens perceived capitalism that were not embedded in a fictional setting. In particular, I checked the weekly journal Household Words, which Dickens edited from 1850 to 1859. Articles in Household Words do not have authors provided. However, Anne Lohrli went through the business and financial records of the publication, which identified the authors and showed who had been paid for each article. The internal records of the journal show that Dickens was the author of this piece from the issue of February 11, 1854, called "On Strike." (Lohrli's book is called Household Words: A Weekly Journal 1850-59, conducted by Charles Dickens, University of Toronto Press, 1973. Household Words is freely available on-line at at site hosted by the University of Buckingham, with support from the Leverhulme Trust and other donors.)

The article does not seem especially well-known today, but it is the source of a couple of the most common quotations from Charles Dickens about "political economy," as the study of economics was usually called at the time. Early in the piece, Dickens wrote: ""Political Economy was a great and useful science in its own way and its own place; but ... I did not transplant my definition of it from the Common Prayer Book, and make it a great king above all gods." Later in the article, Dickens wrote: "[P]olitical economy is a mere skeleton unless it has a little human covering and filling out, a little human bloom upon it, and a little human warmth in it."

But more broadly, the article is of interest because Dickens, telling the story in the first person, takes the position that in thinking about a strike taking place in the town of Preston, one need not take the side either of management or labor. Instead, Dickens writes, one may "be a friend to both," and feel that the strike is "to be deplored on all accounts." Of course, the problem with a middle-of-the-road position is that you can end up being hit by ideological traffic going in both directions. But the ability of Dickens to sympathize with people in a wide range of positions is surely part what gives his novels and his world-view such lasting power. The article goes into a fair amount of detail, and can be read on-line, so I will content myself here with an excerpt. [Note: A version of this article first ran at this blog last year, on Christmas Eve 2014.]

Travelling down to Preston a week from this date, I chanced to sit opposite to a very acute, very determined, very emphatic personage, with a stout railway rug so drawn over his chest that he looked as if he were sitting up in bed with his great coat, hat, and gloves on, severely contemplating your humble servant from behind a large blue and grey checked counterpane. In calling him emphatic, I do
not mean that he was warm; he was coldly and bitingly emphatic as a frosty wind is.

"You are going through to Preston, sir?" says he, as soon as we were clear of the
Primrose Hill tunnel.

The receipt of this question was like the receipt of a jerk of the nose; he was so short and sharp.

"Yes."

"This Preston strike is a nice piece of business!" said the gentleman. "A pretty piece of business!"

"It is very much to be deplored," said I, "on all accounts."

"They want to be ground. That's what they want to bring 'em to their senses," said the gentleman; whom I had already began to call in my own mind Mr. Snapper, and whom I may as well call by that name here as by any other. *

I deferentially enquired, who wanted to be ground?

"The hands," said Mr. Snapper. " The hands on strike, and the hands who help 'em."

I remarked that if that was all they wanted, they must be a very unreasonable people, for surely they had had a little grinding, one way and another, already. Mr. Snapper eyed me with sternness, and after opening and shutting his leathern-gloved hands several times outside his counterpane, asked me
abruptly, " Was I a delegate?"

I set Mr. Snapper right on that point, and told him I was no delegate.

"I am glad to hear it," said Mr. Snapper. "But a friend to the Strike, I believe?"

"Not at all," said I.

"A friend to the Lock-out?" pursued Mr. Snapper.

"Not in the least," said I,

Mr. Snapper's rising opinion of me fell again, and he gave me to understand that a man must either be a friend to the Masters or a friend to the Hands.

"He may be a friend to both," said I.

Mr. Snapper didn't see that; there was no medium in the Political Economy of the subject. I retorted on Mr. Snapper, that Political Economy was a great and useful science in its own way and its own place; but that I did not transplant my definition of it from the Common Prayer Book, and make it a great king above all gods. Mr. Snapper tucked himself up as if to keep me off, folded his arms on the top of his counterpane, leaned back and looked out of the window.

"Pray what would you have, sir," enquire Mr. Snapper, suddenly withdrawing his eyes from the prospect to me, "in the relations between Capital and Labour, but Political Economy?"

I always avoid the stereotyped terms in these discussions as much as I can, for I have observed, in my little way, that they often supply the place of sense and moderation. I therefore took my gentleman up with the words employers and employed, in preference to Capital and Labour.

"I believe," said I, "that into the relations between employers and employed, as into all the relations of this life, there must enter something of feeling and sentiment; something of mutual explanation, forbearance, and consideration; something which is not to be found in Mr. M'CulIoch's dictionary, and is not exactly stateable in figures; otherwise those relations are wrong and rotten at the core and will never bear sound fruit."

Mr. Snapper laughed at me. As I thought I had just as good reason to laugh at Mr. Snapper, I did so, and we were both contented. ...

Mr. Snapper had no doubt, after this, that I thought the hands had a right to combine?

"Surely," said I. " A perfect right to combine in any lawful manner. The fact of their being able to combine and accustomed to combine may, I can easily conceive, be a protection to them. The blame even of this business is not all on one side. I think the associated Lock-out was a grave error. And
when you Preston masters—"

"I am not a Preston master," interrupted Mr. Snapper.

"When the respectable combined body of Preston masters," said I, " in the beginning of this unhappy difference, laid down the principle that no man should be employed henceforth who belonged to any combination—such as their own—they attempted to carry with a high hand a partial and unfair impossibility, and were obliged to abandon it. This was an unwise proceeding, and the first defeat."

Mr. Snapper had known, all along, that I was no friend to the masters.

"Pardon me," said I; " I am unfeignedly a friend to the masters, and have many friends among them."

"Yet you think these hands in the right?" quoth Mr. Snapper.

"By no means," said I; " I fear they are at present engaged in an unreasonable struggle, wherein they began ill and cannot end well."

Mr. Snapper, evidently regarding me as neither fish, flesh, nor fowl, begged to know after a pause if he might enquire whether I was going to Preston on business?

Indeed I was going there, in my unbusinesslike manner, I confessed, to look at the strike.

"To look at the strike!" echoed Mr. Snapper fixing his hat on firmly with both hands. "To look at it! Might I ask you now, with what object you are going to look at it?"

"Certainly," said I. " I read, even in liberal pages, the hardest Political Economy—of an extraordinary description too sometimes, and certainly not to be found in the books—as the only touchstone of this strike. I see, this very day in a to-morrow's liberal paper, some astonishing novelties in the politico-economical way, showing how profits and wages have no connexion whatever; coupled with such references to these hands as might be made by a very irascible General to rebels and brigands in arms. Now, if it be the case that some of the highest virtues of the working people still shine through them brighter than ever in their conduct of this mistake of theirs, perhaps the fact may reasonably suggest to me—and to others besides me—that there is some little things wanting in the relations between them and their employers, which neither political economy nor Drum-head proclamation writing will altogether supply, and which we cannot too soon or too temperately unite in trying to
find out."

Mr. Snapper, after again opening and shutting his gloved hands several times, drew the counterpane higher over his chest, and went to bed in disgust. He got up at Rugby, took himself and counterpane into another carriage, and left me to pursue my journey alone. ...

In any aspect in which it can be viewed, this strike and lock-out is a deplorable calamity. In its waste of time, in its waste of a great people's energy, in its waste of wages, in its waste of wealth that seeks to be employed, in its encroachment on the means of many thousands who are labouring from day
to day, in the gulf of separation it hourly deepens between those whose interests must be understood to be identical or must be destroyed, it is a great national affliction. But, at this pass, anger is of no use, starving out is of no use—for what will that do, five years hence, but overshadow all the mills in
England with the growth of a bitter remembrance? —political economy is a mere skeleton unless it has a little human covering and filling out, a little human bloom upon it, and a little human warmth in it. Gentlemen are found, in great manufacturing towns, ready enough to extol imbecile mediation with dangerous madmen abroad; can none of them be brought to think of authorised mediation
and explanation at home? I do not suppose that such a knotted difficulty as this, is to be at all untangled by a morning-party in the Adelphi; but I would entreat both sides now so miserably opposed, to consider whether there are no men in England above suspicion, to whom they might refer the matters in dispute, with a perfect confidence above all things in the desire of those men to act justly, and in their sincere attachment to their countrymen of every rank and to their country.
Masters right, or men right; masters wrong, or men wrong; both right, or both wrong; there is certain ruin to both in the continuance or frequent revival of this breach. And from the ever-widening circle of their decay, what drop in the social ocean shall be free!

Wednesday, December 23, 2015

Why does some economic activity happen in the form of buying and selling within markets, while other economic activity happens through an administrative process of planning and actions taking inside of firms? What factors affect the decision of whether firms will tend to take a certain activity in-house, or instead will contract to buy that activity in the market? A recent article in The Economist ("Time and the Company," December 5, 2015), offered an intriguing take on this classic question:

"In the 1930s Ronald Coase, an economist, argued that firms existed to perform tasks that entrepreneurs were unable to do easily through markets. But another way of thinking about firms is that they are time transformers, mediating the different time horizons of customers, staff, suppliers and owners. Bondholders, for example, want a steady stream of payments over decades, a stream derived from customers paying instantly for products that take weeks to make and transport and that are sold by staff who are employed for years. The company is the body that can satisfy all of these constituents. This capacity to straddle time frames is most extreme in banks, which raise money in the form of deposits that can be withdrawn immediately and extend that money as loans that take years to repay, an inherently risky process known as `maturity transformation'. But the transformation of time is the business of all companies, not just financial ones."

At least to me, this comment doesn't seem quite fair to Coase and his classic 1937 article "The Nature of the Firm" (Economica, November 1937, pp. 386-405). (Those not familiar with the article will find it a readable trove of insights. A fundamental insight of economics going back to Adam Smith is how supply and demand through the price mechanism operates like a pattern of unconscious cooperation. But as Coase writes, these arguments for the merits (or problems) of the price mechanism don't apply very well to the decision-making that happens within large firms--and these large firms had exploded onto the scene and multiplied in the decades before Coase was writing in 1937. As Coase wrote, quoting D. H. Robertson, firms are "islands of conscious power in this ocean of unconscious
co-operation like lumps of butter coagulating in a pail of
buttermilk.”

It's true that Coase emphasizes that an underlying justification for firms is that using the price mechanism and the market is costly, because it required negotiation of contracts. Coase wrote (footnotes omitted):

The main reason why it is profitable to establish a firm
would seem to be that there is a cost of using the price
mechanism. The most obvious cost of “organising”
production through the price mechanism is that of discovering
what the relevant prices are. This cost may be reduced
but it will not be eliminated by the emergence of specialists
who will sell this information. The costs of negotiating and concluding a separate contract for each exchange transaction
which takes place on a market must also be taken into
account.

In that spirit, much of the work by economists since then on the theory of the firm has looked at difficulties of writing contracts that would specify under all circumstances what property rights would emerge. For a recent example of thinking along these lines Philippe Aghion and Richard Holden wrote an essay "Incomplete Contracts and the Theory of the Firm: What Have We Learned over the Past 25 Years?" for the Spring 2011 issue of the Journal of Economic Perspectives (25:2, pp. 181-97).

However, other parts of Coase's 1937 argument do emphasize that firms are straddling a time dimension. For example, Coase writes:

There are, however, other disadvantages-or costs of
using the price mechanism. It may be desired to make
a long-term contract for the supply of some article or service.
This may be due to the fact that if one contract is made
for a longer period, instead of several shorter ones, then
certain costs of making each contract will be avoided.
Or, owing to the risk attitude of the people concerned,
they may prefer to make a long rather than a short-term
contract. ... It may well
be a matter of indifference to the person supplying the
service or commodity which of several courses of action
is taken, but not to the purchaser of that service or commodity.
But the purchaser will not know which of these
several courses he will want the supplier to take. Therefore, the service which is being provided is expressed in general
terms, the exact details being left until a later date. All
that is stated in the contract is the limits to what the persons
supplying the commodity or service is expected to do.
The details of what the supplier is expected to do is not
stated in the contract but is decided later by the purchaser,
When the direction of resources (within the limits of the
contract) becomes dependent on the buyer in this way,
that relationship which I term a " firm " may be obtained.'
A firm is likely therefore to emerge in those cases where a
very short term contract would be unsatisfactory. It is
obviously of more importance in the case of services--labour--than
it is in the case of the buying of commodities.
In the case of commodities, the main items can be stated
in advance and the details which will be decided later will
be of minor significance.

In some ways, thinking about the nature of the firm as straddling a number of different economic relationships that involve different time horizons is not fundamentally different than an approach which looks at why firms may arise out of incomplete contracts. But the emphasis on different time horizons offers a different slant. In recent years, for example, the time horizons of many players in economic markets have changed: the time horizons of how long investors are willing to wait for a payback; the time horizon of new products emerging; the time horizon of how long workers and their employers expect them to remain with a single firm; and so on. As the time horizons of different players evolve, and the boundaries of what firms will choose to include or to leave out would evolve as a result.

Note: Some may be puzzled by the phrase "Time Lord" in the title of this post. Congratulations! You are even more detached from popular culture than I am, which is not a small achievement. There is a popular television show called Dr. Who, in which the main character is a "Time Lord." Ask a teenager for details.

Tuesday, December 22, 2015

When mulling the market for lithium, consider two points: 1) the battery for a single high-end electric car uses an amount of lithium equal to more than 10,000 cell phones; and 2) electric vehicles are now about 3% of the 70 million cars sold globally, but in a decade electric vehicles could be 22% of the global market. Put those facts together, and you have a surge in demand for lithium. A short commentary from Goldman Sachs (December 5, 2015) is titled: "What if I Told You … Lithium is the New Gasoline." The GS analysts write:

"Electric vehicles are critically important to the growth in lithium demand due to
the much higher per-unit content in car batteries than in traditional consumer electronic battery applications. A typical cell phone
uses 5-7 grams of lithium carbonate equivalent (LCE) in its battery. A TSLA model S with a 70kWh battery uses 63 kilograms – an
equivalent content of more than 10,000 cell phones. ... Should demand
for hybrid electric vehicles (HEVs), plug-in electric vehicles (PHEVs) and BEVs [battery electric vehicles] follow the GS auto team forecast, we believe lithium
demand for all EV applications could grow more than 11x by 2025, adding more than 310,000mt of LCE demand. This compares to
current EV demand that represents only 27,000mt of LCE (17% of the current overall lithium market). In short, growth in EV
applications alone could triple the size of the entire lithium market from 160,000mt today to 470,000mt by 2025."

Rapid growth in lithium demand and production is already underway. According to the annual reports about lithium from the US Geological Survey in its "Mineral Commodity Summaries," annual global production of lithium haws more than doubled from from about 16,000 metric tons in 2004 to over 36,000 metric tons by 2014. Even with this rise in quantity produced, the price of a metric ton of lithium carbonate has risen from $5,180 in 2011 to $6,600 in 2014.

Lithium comes from two main sources: either it is mined from hard rock called sodumene, or it is gathered from underwater brine that is relatively dense in lithium. The US currently has one domestic lithium producer, a brine operation in Nevada. USGS explains:

"In the late 1990s, subsurface brines became the dominant raw material for lithium carbonate production worldwide
because of lower production costs compared with the mining and processing of hard-rock ores. Owing to growing
lithium demand from China in the past several years, however, mineral-sourced lithium regained market share and
was estimated to account for one-half of the world’s lithium supply in 2014. Two brine operations in Chile and a
spodumene operation in Australia accounted for the majority of world production."

Of course, a surge in demand for a certain mineral that drives up prices has predictable consequences in a market: 1) expanding the search for new sources of supply; 2) substitution from other uses of that mineral to where the demand is expanding, at least where it's cost-effective to make the switch; 3) expanded recycling of the mineral; and 4) an expanded search for alternatives to the mineral. All of these are happening in the lithium market.

There seems to be plenty of lithium out there, but the resources need to be developed. The Goldman Sachs report states: "At current production
rates, producing resources have more than 70 years of reserves available with roughly triple that capacity available in proved
undeveloped resources." The search for new sources of supply is well underway, as the USGS explains:

"Lithium supply security has become a top priority for Asian technology companies. Strategic alliances and joint
ventures have been, and are continuing to be, established with lithium exploration companies to ensure a reliable,
diversified supply of lithium for Asia’s battery suppliers and vehicle manufacturers. Several brine operations were
under development in Argentina, Bolivia, and Chile; spodumene mining operations were under development in
Australia, Canada, China, and Finland; and a jadarite mining operation was under development in Serbia. Additional
exploration for lithium continued, with numerous claims having been leased or staked worldwide."

As lithium becomes more valuable for use in batteries, there is likely to be substitution away from its other common uses. The USGS reports that global use of lithium breaks down like this: "ceramics and glass, 35%;
batteries, 31%; lubricating greases, 8%; continuous casting mold flux powders, 6%; air treatment, 5%; polymer
production, 5%; primary aluminum production, 1%; and other uses, 9%." About 5% of global lithium production goes to the pharmaceutical market. Lithium is not essential for most of these uses.

When lithium is heavily used in batteries, it becomes easier to recycle, and such efforts are increasing. Again, the USGS reports: "Historically, lithium recycling has been insignificant but has increased steadily owing to the growth in
consumption of lithium batteries. One U.S. company has recycled lithium metal and lithium-ion batteries since 1992 at
its facility in British Columbia, Canada. In 2009, the U.S. Department of Energy awarded the company $9.5 million to
construct the first U.S. recycling facility for lithium-ion batteries, which was still under construction in 2014."

Finally, there are of course other types of batteries under development, but at least for the medium-term, it seems as if lithium-based batteries have lead in electric vehicle applications. As the Goldman Sachs report notes, "lithium-ion batteries are not the only types of batteries being discussed, but they
are furthest along in development. We believe other technologies are more likely to impact grid storage than transportation applications
in the foreseeable future."

Monday, December 21, 2015

Apparently MTV broadcasts a show called "16 and Pregnant," in which each show tracks a pregnant teen-ager through the final months of pregnancy, and then through birth and the immediate period afterward. Although I fear the show will remain unseen by me, it is apparently watched by enough teenagers that all by itself it put a dent in the US teen birth rate. Melissa S. Kearney and Phillip B. Levine tell the story in "Media Influences on Social Outcomes: The Impact of MTV's 16 and Pregnant on Teen Childbearing," in a recent issue of the American Economic Review (105:12, pp. 3597-3632). (The AER isn't freely available on-line, but many readers will have online access through their library.) Their study is nice example of how modern social science seeks out and builds on a variety of evidence from TV ratings to Twitter accounts.

Kearney and Levine set the stage this way:

In 2012, 29.4 out of every 1,000 girls between the ages of 15 and 19 gave birth in the United States. This rate is considerably higher than that in any other developed country, where typical rates of teen childbearing are more often in the range of 5 to 10 births per 1,000 girls in this age group (Kearney and Levine 2012a). Though still an outlier internationally, the US teen birth rate has declined dramatically over the past 20 years, falling from 61.8 births per 1,000 teen girls in 1991. This decline has occurred in two distinct waves. Between 1991 and 2008, it fell largely continuously from 61.8 to 40.2, representing an annual average rate of decline of 2.5 percent per year. Teen birth rates fell far more rapidly in the next four years, dropping from 40.2 to 29.4, or 7.5 percent per year ...

An obvious question arises here. What factors might have contributed to teen birth rates falling more quickly after about 2008? One possibility is "16 and Pregnant," which started showing in June 2009. Kearney and Levine provide this background on what the show portrays

Among the girls on the show, ambivalence toward teen childbearing is rampant. Only 18 out of 47 report opposition to their pregnancy when they found out, although none report that they were looking to get pregnant. The girls commonly report that they did not think that they would have sex or become pregnant (36 of 47) and that they were ambivalent about getting pregnant (28 of 47). Only 5 of 47 report trying to avoid a pregnancy, but failing. Three-quarters of the girls (36 of 47) report not using any form of contraception at the time they got pregnant.

An important emphasis on most episodes is the relationship between the girl and the father of her child, who is typically her boyfriend. Of all the pregnancies, four led to a marriage prior to the birth and three led to adoption. There were no abortions. Almost all (40 of 47) of the boyfriends stick around through the pregnancy. Many fathers (31 of 44) live with the girl and her child afterwards and most of them (26 of 31) are heavily involved in the child’s life. Only four of the fathers are completely uninvolved. Just over half (24 out of 44) of the relationships between the girl and her boyfriend either collapsed or were very strained by the end of the episode. The show also emphasizes the implications of teen childbearing for the teen mother’s health and well-being. Consistent with national trends, 11 out of the 47 births (23 percent) occurred via C-section; some occurring after up to 26 hours of labor. In addition, in 8 of the 47 pregnancies the mother or her baby experienced a significant health complication. One mother needed to spend a full month in the hospital as a preventative measure. One baby needed to be airlifted to another hospital to receive needed treatment. The show portrays extensive sleep deprivation for the teen mothers. Overall, the realities of the lives of teen mothers are presented in ways that may have been unknown or difficult to imagine for other teens viewing the show.

Levine and Kearney collected data on how many teens watched the show in different viewing areas. Of course, there's a possibility that areas with high teen birthrates might also be more likely to watch the show--but this does not in fact turn out to be true in the data. The authors look at how MTV ratings were correlated with teen pregnancy both before the "16 and Pregnant" show started, and after the show started. They also look for cause-and-effect evidence of what happens right after the show airs. They write:

The results of this analysis imply that the introduction of 16 and Pregnant led teens to noticeably reduce the rate at which they give birth. Our estimates imply that this show led to a 4.3 percent reduction in teen births that would have been conceived between June 2009, when the show began, and the end of 2010. This can explain 24 percent of the total decline in teen births over that period.

Kearney and Levine pushed the analysis another step. They looked at Google Trends to see how common it was to see internet searches on terms like "how to get birth control" or how often Twitter was using terms like "birth control" or "abortion" in tweets. They found that these mentions on social media spiked around the time of episodes of the show. They write: "Large spikes in search activity and tweets about the show are evident exactly at the time a new episode was released. In some specifications, we also see an associated spike in Google searches and twitter messages containing the terms “birth control” and “abortion.” Locations in which the show was more popular experienced greater increases in these types of searches/tweets when the show was on the air."

The fact that a TV show can measurably reduce teen pregnancy is interesting itself, but there is perhaps a broader lesson here. Lots of what passes for teenage health education puts a heavy emphasis on some mixture of dire consequences and preachiness. This television show wasn't part of a public relations campaign--indeed, some critics has expressed concern that it might glamorize teen pregnancy. But as Kearney and Levine write:

This show produced by MTV was not specifically designed as an anti-teen childbearing campaign, but it seems to have had that effect by showing that being a pregnant teen and a new mother is hard—it strains relationships with friends, parents, and the baby’s father, and means physical discomfort, potential health problems, and sleep deprivation. Apparently those images affected teenage viewers’ motivation to avoid that outcome. This implies that addressing teens’ motivation for avoiding teen parenthood can be an effective tool and, furthermore, that compelling social media can be used as a policy lever to do so.

For those who would like an overview of some previous work by Kearney and Levine on teen pregnancy, here are a couple of earlier posts:

Friday, December 18, 2015

There aren't a whole lot of questions more touchy than whether children of married couples do better than children of unmarried couples or single parents. Indeed, a common response to this question is to evade it. See if you can spot the logical flaw in this syllogism: Proposition 1: Some marriages can be really bad. Proposition 2: Some single parents can do really well. Conclusion: There's no way to judge whether marriage helps children.

It's also true that providing persuasive evidence on the question of how marriage affects children is genuinely difficult. Just comparing children with married and unmarried parents is clearly not adequate, because married and unmarried parents are likely to differ in lots of ways--and compared with these other systematic differences, the issue of whether they are married may not be the most important factor to their parenting performance. Thus, I was delighted to see the Fall 2015 issue of The Future of Children, which offers an overview and eight essays on the theme "Marriage and Child Well-being Revisited." For the impatient, here's the punch line from the overview by Sara McLanahan and Isabel Sawhill (footnotes omitted):

Marriage is on the decline. Men and women of the youngest generation are either marrying in their late twenties or not marrying at all. Childbearing has also been postponed, but not as much as marriage. The result is that a growing proportion of children are born to unmarried parents—roughly 40 percent in recent years, and over 50 percent for children born to women under 30. Many unmarried parents are cohabiting when their child is born. Indeed, almost all of the increase in nonmarital childbearing during the past two decades has occurred to cohabiting rather than single mothers. But cohabiting unions are very unstable, leading us to use the term “fragile families”
to describe them. About half of couples who are cohabiting at their child’s birth will
split by the time the child is five. Many of these young parents will go on to form new
relationships and to have additional children with new partners. The consequences of
this instability for children are not good. Research increasingly shows that family
instability undermines parents’ investments in their children, affecting the children’s
cognitive and social-emotional development in ways that constrain their life chances.

How does one tackle the question of how marriage affects children in a way that opens up some insights? With no disrespect to the other essays in the volume, here are a few that especially caught my eye.

David C. Ribar asks: "Why Marriage Matters for Child Wellbeing." Ribar generates a long list of ways in which marriage might help children: for example, marriage on average may be associated with greater income, assets, and wealth; greater access to borrowing credit, and health insurance; availability of time, broader social networks, economies of scale and specialization in household production and family living; different patterns of inter-family bargaining; and less family instability, complexity, dysfunction, and conflict. If this a complete list of the pathways that that cause marriage to help children, then a statistical analysis adjusting for these factors should account for all of the differences between children who grow up with married or not-married parents. Testing this hypothesis is difficult, because data on a number of these pathways is limited. Ribar also points out that a number of these factors, and especially the economic factors, are somewhat amenable to policy interventions. But Ribar's judgement is that these factors make a difference, but do not account for all of the difference in how marriage seems to affect children. He writes:

While interventions that raise incomes, increase parental time availability, provide alternative services, or provide other in-kind resources would surely benefit children, these are likely to be, at best, only partial substitutes for marriage itself. The advantages of marriage for children appear to be the sum of many, many parts.

Shelly Lundberg and Robert A. Pollak take a different approach in "The Evolving Role of Marriage: 1950 –2010." They argue that the gains from marriage are shifting. Some decades back, marriage was about a division of household labor. Now, they argue that marriage is often about a commitment to make a joint investment in raising children, and those who have higher levels of income and education are better-positioned to be making that commitment of waiting to have children until after marriage, at a time when ready to commit to that joint project of marriage and raising children. From the summary of their article:

The primary source of gains from marriage has shifted from production of household services to investment in children. For couples whose resources allow them to invest intensively in their children, marriage provides a commitment mechanism that supports such investment. For couples who lack the resources to invest intensively in their children, on the other hand, marriage may not be worth the cost of limited independence and potential mismatch.

Gary J. Gates tackles the subject of "Marriage and Family: LGBT Individuals and
Same-Sex Couples," which over time should offer some new evidence on the effects of marriage on child-bearing. From the summary:

After carefully reviewing the evidence presented by scholars on both sides of the issue, Gary Gates concludes that same-sex couples are as good at parenting as their different-sex counterparts. Any differences in the wellbeing of children raised in same-sex and different-sex families can be explained not by their parents’ gender composition but by the fact that children being by raised by same-sex couples have, on average, experienced more family instability, because most children being raised by same-sex couples were born to different-sex parents, one of whom is now in the same-sex relationship. That pattern is changing, however. ... Compared to a decade ago, same-sex couples today may be less likely to have children, but those who do are more likely to have children who were born with same-sex parents who are in stable relationships. In the past, most same-sex couples raising children were in a cohabiting relationship. With same-sex couples’ right to marry now secured throughout the country, the situation is changing rapidly.

Finally, Daniel Schneider takes an interesting tack in "Lessons Learned from Non-Marriage
Experiments." He looks at a range of "social experiments"--that is, research studies in which people were randomly assigned to one group that received some kind of program or benefit, and thus could be compared to the "control" group didn't get the program or benefit. This methodology is widely recognized as being a powerful one, and these kinds of studies have been done in lots of areas, including projects in which the randomly chosen family received support for early childhood education, human capital development, workforce training, and income support. These studies were not designed to study marriage and children, but many of the studies collected data on marriage as part of the overall research effort. From the summary:

Schneider describes each intervention in detail, discussing its target population, experimental treatment, evaluation design, economic effects, and, finally, any effects on marriage or cohabitation. Overall, he finds little evidence that manipulating men’s economic resources increased the likelihood that they would marry, though there are exceptions. For women, on the other hand, there is more evidence of positive effects.

The evidence throughout this volume is inevitably limited and contingent. But it seems to me to support an argument that marriage (on average, and of course with exceptions) seems likely to be more than the sum of a list of ingredients like income and time. Getting married sets up a day-to-day context if interactions, expectations, and responsibilities that over time will often affect how you behave in a wide variety of contexts, including how you act when comes to raising children, and of course in other ways as well.

Wednesday, December 16, 2015

Back in 1981, actuarial projections foretold that Social Security could go broke as early as August 1983. A bipartisan commission, led by Alan Greenspan, was appointed by President Reagan and Congressional leaders to offer recommendations. Under political pressure from all sides, the commission process eventually produced a set of proposals to raise the Social Security payroll tax, phase in a later retirement age, and make some technical changes to benefit formulas that had the effect of trimming the future growth of benefits. These changes allowed the Social Security trust fund to start building up, with the idea that when the the baby boom generation started to hit retirement age around 2010, there would be enough funding on hand. But it was apparent even back in the later part of the 1980s that while the Greenspan commission agreement had bought a half-century or so of solvency for the system, Social Security might well need revisiting in the second or third decade of the 21st century.

Well, the retirement of the baby boomers is underway and the time for that next round of Social Security changes is arriving. The Congressional Budget Office has a useful report out Social Security Policy Options, 2015 (December 15, 2015), which lists the menu of options. As I read the report, which is so similar to other reports of its kind that I've been seeing for the last 15 years or more, I find myself thinking that there should be a political opportunity here. In the run-up to the 2016 elections, what party or politician is willing to look at the menu of options, pick a few of them, and then claim credit for taking the lead on fixing Social Security.

For background, here's the CBO figure showing the currently projected path for Social Security.

A few points about the diagram are worth noticing.

First, from 1985 up into the 2000s, the revenues going into the Social Security system exceeded the outlays. This was one legacy of the Greenspan commission reforms--that is, building up a larger trust fund.

Second, you can see outlays start rising sharply around 2010. Part of this change was workers in their 60s who were bushwhacked by the Great Recession and ended up going on Social Security sooner than they had planned. But you can also see that the rise in benefits payed (as a share of GDP) rises up to about 2035, when the retirement of the boomer generation will have run its course.

Third, notice that the system is now paying out more in benefits each year than it is collecting in taxes. It can do this because of the trust fund that was accumulated earlier.

Fourth, the trust fund runs out of money around 2034, which is why the the solid line in the figure drops down at that point, showing that if the system then relies on the taxes it is taking in, benefits will have to be substantially lower than currently promised.

Fifth, the gap between benefits and receipts doesn't change much after about 2035. This tells you that the Social Security problem is essentially a one-time problem, occurring as a result of the retirement of the boomer generation. If we can enact a series of reforms that moves up the receipts line and moves down the benefits line, then after about 2035 the system can be fairly stable for decades into the future.

So what does the menu of options look like? The CBO report lists 36 options, but many of them would have only a relatively small effect in addressing the overall problem. Here's a table that you may need to enlarge to read, but here's the gist of it. The lines on the right-hand side show what portion of the shortfall in Social Security over the next 75 years would be addressed by a given proposal.

The key point is that there are lots of proposals that would address major chunks of the the problem.

For example, on the tax side one might choose to phase in an increase of two percentage points in the payroll tax over the next decade, or to raise the amount of income covered by the payroll tax over the next 10 years up to about $320,000. Either step, assuming no corresponding change in benefits ,would solve about 40% of the long-run financing gap for Social Security.

Keep phasing in a later age of full retirement. For example, if full retirement age is gradually raised by by two months per birth year, it would eventually reach age 70 for workers who were born in 1978--and who are turning 70 in 2048. This step would solve about 30% of the long-run financing gap for Social Security.

Then tweak the benefits formula in a few ways. Given longer life expectancies and work histories, it makes sense to base the Social Security benefits formula on your top 40 years of earnings, rather than on the top 35 years. You could also use "progressive price indexing," where those receiving lower levels of benefits would see the same increases as in current law, but those receiving higher benefits would see a slightly slower increases over time.

Some combination of tweaks like this would raise enough money so that Social Security could both address its long-term financial troubles and even have something left over to raise the benefits of some of the poorest people receiving Social Security and keep them above the poverty line.

In short, fixing Social Security isn't rocket science. If you don't like my suggestions, pick your own from the lists above. But no party or politician seems willing even to talk in these terms. The political problem with seems to be that neither party is content with just fixing Social Security as it stands.

A lot of Republicans would like to see part of all of Social Security converted to a system of private retirement accounts. A lot of Democrats prefer a set of changes that would increase Social Security taxes on those with higher income levels and use the funding to pay the existing promised benefits--perhaps with some extra payments to those with the lowest income. Because this approach puts all the costs on those with higher incomes, but doesn't raise the benefits those people would receive, it would shift Social Security away from being a (mostly) contributory retirement system with a modest degree of redistribution to a system with a much heavier degree of redistribution. In short, both sides are taking turns either ignoring the issue or else pushing for their preferred changes at the expense of just fixing what's broke.

The Greenspan commission reforms back in the early 1980s only got traction when the system was scheduled to go broke in two years. Maybe our fractured political system is incapable of addressing this issue until the trust fund has less than two years to run. But I do wonder if there wouldn't be a political advantage to some party or politician from saying: "Here's a common-sense approach to fixing Social Security. Sure, it doesn't make all the changes I'd prefer to see, but it will work, and it will bring at least another half-century or more of solvency."